Bloomberg News

Sealed Air Shares Diminished by 52% Diversey Premium: Real M&A

June 02, 2011

June 2 (Bloomberg) -- Sealed Air Corp. is handing Clayton Dubilier & Rice LLC an almost $1 billion windfall at the expense of its own shareholders by paying a 52 percent premium for Diversey Holdings Inc.

The $2.9 billion takeover of Diversey, the cleaning- products maker owned by Clayton Dubilier and descendants of Samuel Curtis Johnson, values the New York-based private equity firm’s 46 percent stake at $1.34 billion, according to data compiled by Bloomberg. That’s almost triple the amount Clayton Dubilier paid in November 2009. Including net debt, the $4.3 billion price tag is 11.9 times Diversey’s earnings, higher than the average 7.8 times for the most comparable deals this year.

Sealed Air’s Chief Executive Officer William Hickey is attempting the biggest deal for the maker of Bubble Wrap in over a decade after competitors returned more than 20 times as much to their owners in the past five years. While Sealed Air climbed to a three-year high in February on speculation it would get taken over, the Elmwood Park, New Jersey-based company has since declined 16 percent through yesterday as it pursues a business that’s less than half as profitable as its own operations.

“All I can say at this point is ‘ouch.’ What on earth are they doing?” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “They are giving Clayton Dubilier a huge windfall. It’s not clear if what they are getting is worth what they are paying. They are doing it at the expense of the shareholders, which is a real problem.”

Emerging Markets Bet

After the deal was announced, shares of Sealed Air, the maker of Cryovac food packaging, Jiffy protective mailers and medical supplies such as sterile sealed packaging, yesterday retreated 7.2 percent as it traded without the right to its quarterly dividend. The stock slumped another 6 percent to $22.40 in New York today.

Hickey said Sealed Air bought Diversey to generate sales from emerging market food processors concerned about product safety. Diversey provides cleaning and sanitizing detergents, gels and foam, plus electronic dispensers to customers in the food and beverage, health-care and lodging industries.

“It’s not intuitively obvious unless you look in our space and look at the issues that our customers have, and look at the issues that kind of the world has on a going forward basis,” he said in a telephone interview. “There’s a real opportunity to be a leader in a space that’s now very, very fragmented.”

“The first day of trade is not the meaningful one,” the 66-year-old CEO said.

Target to Acquirer

John Matthews, a spokesman at Sturtevant, Wisconsin-based Diversey, said the acquisition by Sealed Air is a “very strong strategic initiative.” He also said Clayton Dubilier “made us better at what we do.”

A representative for Clayton Dubilier declined to comment.

Sealed Air agreed to pay Diversey $2.1 billion in cash and 31.7 million shares of Sealed Air common stock valued at $25.68 on May 31, the day before the deal was announced. The purchase also includes $1.36 billion of Diversey’s net debt.

The acquisition is the second-largest in the company’s history, behind the $4.8 billion purchase of the Cryovac food- packaging business in 1998 from W.R. Grace & Co., Hickey said. Sealed Air currently has a market value of $3.8 billion.

“There was a certain element of the market betting that Sealed Air themselves could be an attractive takeout candidate,” said Ghansham Panjabi, an analyst at Robert W. Baird & Co. in New York. “Clearly that’s not going to be the case. People are wondering why they didn’t acquire something in more traditional packaging versus acquiring something in a completely different business.”

Shareholder Returns

Based on the price that Hickey agreed to pay for Diversey, Clayton Dubilier stands to reap a windfall of about $861 million on its initial $477 million investment, data compiled by Bloomberg show. That represents a 180 percent profit for the buyout firm’s investors in 18 months.

In that span, Hickey generated a total return of 11 percent for Sealed Air owners through yesterday. The Standard & Poor’s 500 Index, the benchmark for American common equity, returned more than twice as much as Sealed Air with a 23 percent gain, including payouts.

“It’s obviously a great investment for the private equity firm and they did their homework in finding the right buyer,” said Jack Ablin, chief investment officer for Chicago-based Harris Private Bank, which oversees $60 billion.

Diversey is also more costly than comparable specialty chemicals deals this year, data compiled by Bloomberg show.

Relative Value

Tom Dohrmann, a credit analyst who covers Diversey at Fitch Group Inc. in New York, cited three comparable deals this year: Berkshire Hathaway Inc.’s $9 billion purchase of Lubrizol Corp. in March, Solvay SA’s takeover of Rhodia SA in April, and Ashland Inc.’s $3.2 billion acquisition of International Specialty Products Inc. last month.

Ashland of Covington, Kentucky, paid the highest multiple, valuing Wayne, New Jersey-based International Specialty Products at 8.9 times earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show.

Sealed Air is spending almost 12 times Diversey’s Ebitda of $359 million in the past 12 months, its regulatory filing showed. Using adjusted Ebitda, the deal is valued at 9.5 times.

“Sealed Air is willing to overpay for this company because they think this is their best chance to diversify into a new segment as well as penetrate emerging markets,” said Michael Yoshikami, chief investment strategist at YCMNet Advisors, which manages $1 billion in Walnut Creek, California. “It’s going to all come down to the execution, if their salespeople can leverage out the packaging materials into the disinfectants market. The jury is out on that.”

Deal Rationale

Sealed Air is turning to Diversey to boost returns after producing only a 1.6 percent increase for shareholders over the past five years, including dividends. In the same period, materials producers in the S&P 500 advanced 34 percent.

While Hickey will gain more international sales with Diversey, he’s buying a business that gets less operating income per dollar of revenue than his own company.

Over the past five years, Diversey had an average operating margin of 3.3 percent, according to its filing. Sealed Air had an 11.6 percent margin, while St. Paul, Minnesota-based Ecolab Inc., Diversey’s biggest competitor, had a margin of 12.7 percent, data compiled by Bloomberg show.

“Does this mean that Sealed Air is going in a different direction?” said Stewart Capital’s Polley. “I don’t know. What I do know is that companies that tried to get into businesses they don’t know a whole lot about almost always get into trouble. It doesn’t make sense.”

--With assistance from Will Daley and Justin Doom in New York and Mary Jane Credeur in Atlanta. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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